Can Elon Musk do the math on owning Twitter? It’s Daisy.

Now that Elon Musk has completed his $44 billion deal for Twitter, let’s take a look at the math behind owning the social media company.

This is not just an academic activity. Musk’s ability to put numbers to work will directly affect the health of the service called World City Square, which will determine the direction of his business and platform. If the financial situation is dire, any plans to invest in Twitter may have to take a back seat and just pay the bills.

These numbers are already daunting. The $44 billion acquisition is the largest leveraged buyout of a tech company in history. To seal the deal, Musk, the world’s richest man, owed about $13 billion in debt to the company, which has not been profitable in eight of the past 10 years. The agreement was signed before the global economy was headed toward a recession due to soaring interest rates. Digital advertising, which accounts for 90% of Twitter’s revenue, has been declining among the social media company.

“Tech companies should be flexible enough to pay for new levels of R&D and innovation,” said Drew Pascarella, a senior lecturer in finance at Cornell University who worked as a banker advising on acquisitions . This acquisition “completely eliminates flexibility”.

Representatives for Twitter and Mr. Musk did not respond to requests for comment.

Last year, Twitter’s interest expense was about $50 million. With new debt taken on in the deal, it will now balloon to about $1 billion a year. However, the company’s operations last year generated about $630 million in cash flow to meet its financial obligations.

That means Twitter generates less money each year than it owes its lenders. The company also doesn’t appear to have a lot of extra cash on hand. While it had about $6 billion in cash prior to Mr. Musk’s acquisition, a significant portion of that is likely to go toward the cost of completing the acquisition.

That gives Mr. Musk a little leeway, Mr. Pascarrera said. “They’re essentially taking all the financial resources of the company and putting it into paying down debt,” he said.

To stay afloat, Musk may have to slash costs. Over the weekend, he was said to have started ordering layoffs on Twitter. An investor who paid less than $1 million for the company said the head of Musk’s family office told him that about 50 percent of Twitter’s 7,500 employees were expected to be laid off.

Musk could make layoffs in many areas at Twitter. The company spends about $1.2 billion in annual sales and marketing expenses, a large portion of which goes to employee salaries, benefits and other compensation. But by cutting those costs, he risked firing employees with irreplaceable relationships with advertisers.

Then there’s the $1.2 billion that Twitter spends a year on research and development, which is also mostly spent on employee compensation. Mr Musk could also cut jobs there. But he said he had big plans for the site, such as cracking down on fake accounts and creating new ways to curate content, which required people to develop those tools. Musk has said the type of engineer he wants to hire is expensive.

There are other ways to cut costs — like money spent on rent, data centers, and extras, which collectively cost companies more than $1 billion a year, but can be harder to cut quickly. Unlike traditional leveraged buyout targets, Twitter apparently doesn’t have a specific business to spin off or downsize, like a struggling division.

“That has been the biggest challenge of this acquisition,” said Eric Talley, a professor of corporate law at Columbia Law School. “The last thing you want to do is sell what you need to run Twitter on a profit basis. Then you basically have your hands tied behind your back.”

If even cutting costs doesn’t help, Tully said, Musk may need to raise more money from outside investors within a year.

Mr. Musk already owes about $13 billion in debt from lenders, while other investors, such as venture capital firms Sequoia Capital and Andreessen Horowitz, have put in about $7.1 billion in cash. Musk himself is personally responsible for the remaining roughly $25 billion in acquisitions, and it’s unclear whether he has assembled more investors to help ease that burden.

If Twitter needs more funding in a year, finding new investors could be problematic given the company’s economics. Even Musk admitted that his initial investors in a deal that valued Twitter at $44 billion “clearly overpaid.” Shares of many social media companies have plunged this year as they face the same problems as other economies.

Given his net worth of more than $200 billion, Musk himself could theoretically help meet Twitter’s additional cash needs. He could also try to acquire some of Twitter’s lenders and reduce its debt load.

But much of his wealth is tied to shares of his electric car company Tesla, which has plunged about 40% this year. At one point, Musk tried to walk away from buying Twitter, and he might choose not to put more money into at least his fifth company.

Putting more money into a leveraged, slow-growing company like Twitter is also not the same as investing in a fast-growing venture-backed startup like his rocket-making company SpaceX. Twitter is more risky, because the bank offering the loan only cares about earning interest on the day it is owed. Unlike real estate companies, Twitter doesn’t have a ton of assets to offer lenders as collateral to stop them.

Still, billionaires have tried to back troubled deals. Hedge fund manager Eddie Lampert tried to rethink retail and spent billions keeping Sears afloat after a failed merger with Kmart in the 2000s. Sears filed for bankruptcy protection in 2018.

Mr. Musk got into businesses, like making electric cars, long before opponents said they were doomed and proved them wrong. Twitter, which has been mismanaged for years, could benefit from repairing its business from the glare of the public markets. Mr. Musk can bring new product ideas and hire engineering experts who might not have previously wanted to work for Twitter.

Mr. Musk is “an extraordinary capital allocator, and I think he’s going to make a lot of money on Twitter,” said Chamath Palihapitiya, a venture capitalist and an early Facebook executive. “It doesn’t fit my risk profile. But I think he’ll be very successful.”

Others cautioned against the enthusiasm that initially drove investors to accept Musk’s deal, warning that the appeal of the tech visionary may fade as the market develops, especially as global economic worries have mushroomed in recent months. emergencies.

“At the height of market booms, these calls were more likely to work than we are now entering,” said Robert Bruner, a professor at the University of Virginia’s Darden School of Business and author of “The Deal.” From hell. “

Mr. Bruner said the worst deals usually happen at the peak of the market — like Musk’s acquisition of Twitter. He presented what he thought could be the worst-case scenario for the company. In that future, Mr Musk will not be able to “reduce spending to the level needed to pay the debt load.” This will “slowly erode the company’s equity and he won’t be able to find more equity investors.”

Final result? “Slowly, Twitter collapsed,” Mr. Bruner said.

Maureen Farrell Contribution report.

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